Question

Person A, Person B and Person C own stock in the same company. All of them are loss averse and have the same value function: v(x)=x for gains and v(x)=-2x for losses. The stock's price

Answer 1

To calculate the expected profit of the stock investment, we combined the expected values of each possible outcome, which resulted in an expected profit of $150 after one year.

Step-by-step explanation:

The student is asking how to calculate the expected profit from an investment in stock over a year, given certain probabilities for gain, loss, and no change in investment value. To find the expected profit, we multiply each outcome by its probability and sum the results.

1. Multiply the loss outcome (-$1,000) by its probability (35%), resulting in an expected loss of -$350.
2. Multiply the no change outcome ($0) by its probability (60%), resulting in $0, since there's no gain or loss.
3. Multiply the gain outcome ($10,000) by its probability (5%), resulting in an expected gain of $500.
4. Add up the expected values from each outcome to find the total expected profit, which is -$350 + $0 + $500 = $150.

Therefore, the expected profit after one year is $150.